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HMRC hands lifeline to Brits with LTA protection

AJ Bell says abolishing the lifetime allowance ‘comes with a nasty sting in the tail’ for others

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The Spring Budget brought the news that the lifetime allowance (LTA) is to be abolished, removing the cap of £1.073m ($1.3m, €1.23m) on the total that Brits can build in their pension savings without a tax charge.

But not all pension savers will be eligible to receive the full amount of tax-free cash they might expect from their pension pot. This amount will be capped unless pension savers had already registered for LTA ‘protection’ by 15 March this year.

Rachel Vahey, head of policy development at AJ Bell, said: “The incredible news that the lifetime allowance is to be abolished came with a nasty sting in the tail. Tax-free cash will be capped for pension savers at £268,275, although those who have previously applied for LTA protection get to keep any higher tax-free cash amount.”

Rules to date for pension savers with enhanced or fixed protection state that protection is lost if contributions are paid in or if benefits accrue. This also applies where there are new pension arrangements or certain types of pension transfer.

However, HMRC has confirmed that as long as they registered for those protections before 15 March, these rules will not apply and these pension savers will be allowed to keep the higher tax-free cash amount.

Good news

Vahey added: “Initially it seemed those with enhanced or fixed protection risked losing their protection – and therefore their higher tax-free cash – if they broke the protection rules by paying more into their pension. This would have effectively stopped them from being able to benefit from the removal of tax limits.

“It’s good news to learn that, instead, they will be free to start paying in contributions or transfer pension arrangements without any nasty consequences. In addition, they may be able to carry forward their unused annual allowance from the previous three years, meaning they could pay a total contribution of £180,000 next tax year if they have earnings to support it.

“We still need to see the details in the Spring Finance Bill, but it now looks like those with enhanced and fixed protection have got a boost to take advantage of the new tax-free pension rules while still getting to keep their higher tax-free cash entitlement.”

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